Three Rules of Thumb for Buying a House (in the Military)
I wrote this article a couple of months ago, which you can find here. However, I’ve made some changes, because there are some things you should consider when buying a house in the military.
The largest purchase most people will make in their lifetime is their home. It’s also the longest-lasting purchase most people will make. With that in mind, it is important that you buy a home that brings you joy instead of grief.
Too many people stretch their finances beyond the breaking point, buying a home they can’t afford and paying the price via financial strain, a decreased quality of life and even family strife. Being in the military adds extra stress, with deployments and PCS moves bringing the possibility of having to relocate.
While following these basic rules of thumb can help ensure that you don’t overextend yourself in your search for the right home, you need to keep in mind that you shouldn’t be buying a house unless you are reasonably sure that you will stay at that location for five years or more.
Although many servicemembers have successfully bought houses & converted them into profitable rentals, many more servicemembers have had to endure headaches associated with unprofitable properties or being caught in a market downturn. Having to rent your house out at a $500 monthly loss because you’re $50,000 underwater is not fun. Below are three rules that should help you stay in good shape (if you don’t have to convert to a rental–that’s for another article).
Buying a House Rule #1: Avoid PMI
The first rule when buying a house is to make sure that you have enough saved for a down payment; 20% should suffice. A 20% down payment will allow a borrower with good credit to qualify for the best mortgage interest rates while avoiding private mortgage insurance (PMI).
PMI is required for some mortgages when a lender is afraid you might default on payments. In essence, PMI is a lender’s insurance policy that the borrower pays for. You get nothing out of it, and it costs you money. So, assuming you have good credit, having enough for a 20% down payment lets you avoid that losing game.
Note: With a VA mortgage, you do not have to pay PMI, but you will probably pay a VA funding fee (unless you’re receiving VA disability benefits).
Buying a House Rule #2. Control your PITI
The second rule is that your PITI (mortgage principal, mortgage interest, property taxes and homeowner’s insurance) should be about one-fourth of your total living expenses. For example, if your total expenses are $4,000 per month, then your PITI should be about $1,000. (And, of course, your expenses should be covered by your income, after you’ve made sure to put away money for retirement savings, emergency funds and other safeguards.)
Mortgage lenders use a so-called 28% rule when considering your application; that is, no more than 28% of your total income should go toward housing. Budgeting around one-fourth of your total expenses toward PITI should assure you’re in good shape.
Note: Having access to USAA is a great way to manage your insurance expenses. USAA is recognized nationally as one of the best insurance companies. However, USAA does not provide coverage in all areas, so make sure you do your due diligence on your insurance company if USAA will not insure your home.
Buying a House Rule #3. Remember maintenance costs
It’s smart to budget approximately 1% of your house’s total cost for annual maintenance. This is just the cost of maintaining the house and grounds; it doesn’t include upgrades or planned repairs. For a $300,000 house, this comes out to $3,000 per year, or $250 per month. Although that might sound like a lot of money to put aside, you’ll be thankful it’s there when you need to fix your air conditioning or a hole in your roof.
Note: If this house becomes a rental, you’re going to want to budget 10% of your rents towards repairs & 10% towards capital expenditures, like replacing appliances.
The bottom line
Following these rules might seem difficult, particularly saving 20% for a down payment. However, if you can do that, you’ll likely be able to afford mortgage payments, especially since they’ll be taking the place of rent and adding equity to your home. Also, if you’re able to save 20% for a house, you should have no problem maintaining an emergency fund, which it’s smart to have anyway.
Many people find that with consistent effort and a little planning, they can afford a home of their own. If you’re not sure whether you can, talk to a fee-only financial planner in your area. Working with a fee-only planner is the best way for you to ensure that you’re moving in the right direction.